Will Latest Data Compel the BOC to Drop its Rate-Hike Bias?

Canadian consumer prices continued to languish far below the Bank of Canada’s 2% inflation Target in May, a situation that may shift inflation expectations lower and compel the central bank to drop its rate-hike bias.

The headline consumer price index grew 0.7% year-on-year last month, Statistics Canada said Friday. While that was a faster pace than in April, when inflation hit a three-and-a-half year low of 0.4%, prices remained outside the lower point of the Bank’s 1-3% inflation-targeting range.

The core CPI rate, which excludes volatile components including some food and energy prices, was barely inside the range, growing 1.1% year-on-year, the same pace as the prior month. Both measures were softer than expected.

A separate report on retail sales in Canada provided a clue to one of the reasons for soft consumer prices: stiff competition from U.S. retailers setting up shop in Canada, including such big names as Target Corp. The value of sales at clothing stores shrank 2.6% in April from March, and shoe stores took in 2.4% less.

The Bank of Canada sets policy to achieve a 2% inflation target, but there’s been a wide gap between that figure and the actual CPI rate.

“It’s getting a little worrisome,” according to Ian Pollick, fixed income strategist at RBC Capital Markets, who estimates that only 28% of the basket of items that make up the CPI was over the 2% level in May.

“What that tells you is, the breadth of disinflation is very large,” in fact, the largest is over a decade, Mr. Pollick told Canada Real Time.

He and other economists will be paying close attention to findings in the upcoming quarterly Bank of Canada’s Business Outlook Survey, particularly the question on inflation expectations.

The last three surveys showed over half respondents–as much as 61% in the April poll–were looking at inflation in the 1-2% range.

Stephen Poloz, Canada’s new top central banker, said this week that the Bank of Canada cares as much if inflation is over or below the target.

If there’s a further downshift in inflation expectations in the July 8 survey, “the tightening bias should be dropped over the next couple of meetings,” Mr Pollick said.

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com